Abstract
Using exogenous variations associated with the introduction of China’s Labor Contract Law, this paper investigates whether and how employment protection affects stock price crash risk. We document evidence of a significant increase in future stock price crash risk by 48 %, at least for those most affected firms relative to those least affected following the law’s introduction. Further analysis suggests that the positive relationship is more pronounced for firms with low-cost elasticity, high labor expenditure, and low firm profitability, for firms facing more asymmetric information, firms with weak corporate governance, non-state-owned enterprises (SOEs), and firms in regions with relatively weak labor protection. Taken together, our study highlights the importance of employment protection in shaping corporate behavior. [141 words]
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